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Real Estate Agent Booklet

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									                             NEWSFLASH BOOKLET
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                Queensland                                     New South Wales                                         Victoria
Gold Coast                               PNA     Kiama                                      NIA      Geelong                                CPA
Level 5, Seabank Building Marine Parade          2/114 Terralong Street,                             7 Westcott Street,
Southport Qld 4215                               Kiama NSW 2533                                      Newtown Victoria 3220
Mail to:   98 High St, Tenterfield NSW 2372      Mail to: PO Box 5062 Nowra DC NSW 2541              Mail to: PO Box 8152 Newtown Vic 3220
Phone :    Phone: (02) 6736 5383                 Phone: (02) 4233 2825                               Phone: (03) 5222 8489
Fax:       (02) 6736 5655                        Fax:      (02) 4447 8169                            Fax:     (03) 5222 8489
E-mail:    goldcoast@bantacs.com.au              Email: kiama@bantacs.com.au                         E-mail: geelong@bantacs.com.au

Ningi                                    CPA     Nowra                                      NIA      Fitzroy                                CPA
Shop 17A 1224 Bribie Island Rd,                  93 BTU Road,                                        151 St Georges Road,
Ningi Qld 4511                                   Nowra Hill NSW 2540                                 Fitzroy North VIC 3068
Mail to:   Location                              Mail to: PO Box 5062 Nowra DC NSW 2541              Mail to:   PO Box 8152 Newtown Vic 3220
Phone:     (07) 5497 6777                        Phone: (02) 4447 8686                               Phone:     (03) 5222 8489
Fax:       (07) 5497 6699                        Fax:      (02) 4447 8169                            Fax:       (03) 5222 8489
E-mail:    ningi@bantacs.com.au                  Email: nowra@bantacs.com.au                         Email:     fitzroy@bantacs.com.au
Stanthorpe                               PNA     Tenterfield                               PNA       Highett                                CPA
63A Maryland Street, Stanthorpe Qld 4380         98 High Street, Tenterfield NSW 2372                1/487 Highett Road, Highett VIC 3190
Mail to: 98 High St, Tenterfield NSW 2372        Mail to: Location                                   Mail to:   PO Box 8152 Newtown Vic 3220
Phone: (07) 4681 4288                            Phone: (02) 6736 5383                               Phone:     (03) 5222 8489
Fax:     (02) 4681 4028                          Fax:     (02) 6736 5655                             Fax:       (03) 5222 8489
E-mail: stanthorpe@bantacs.com.au                E-mail: tenterfield@bantacs.com.au                  Email:     highett@bantacs.com.au

             Western Australia                   Burwood                                   CPA           BAN TACS Accountants Pty Ltd
                                                 Suite D, 37A Burwood Rd, Burwood NSW 2134
Perth                                    CPA
312 Oxford Street, Leederville WA 6007           Mail to: Location
                                                 Phone: (02) 9744 7880
Mail to: PO Box 1, Mt. Hawthorn WA 6915          Fax:     (02) 9744 7882
Phone: (08) 9443 5199                            E-mail: burwood@bantacs.com.au
Fax:     (08) 9443 5299
E-mail: perth@bantacs.com.au

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           REAL ESTATE AGENTS BOOKLET
      EVERYTHING YOU EVER WANTED TO KNOW BUT UNTIL NOW
                COULDN’T GET STRAIGHT ANSWERS
 Important – This booklet is simply a collection of Newsflash articles relevant to Real Estate Agents.
 The articles are transferred from Newsflash into this booklet so it is best read from the back page
 forwards to ensure you are reading the latest article on the topic first. Note that the information
 contained in this booklet is not updated regularly so it is important that you seek professional advice
 before acting on it.
                                                                        CONTENTS
CGT .......................................................................................................................................................................................................3

PRINCIPAL PLACE OF RESIDENCE CGT EXEMPTION..........................................................................................................3

SECRET PLANS AND CLEVER TRICK – CGT & NON-CAPITAL COSTS .............................................................................4

DEMOLISHING A RENTAL PROPERTY ......................................................................................................................................4

THE 50% CGT DISCOUNT ...............................................................................................................................................................5

CGT – 50% DISCOUNT – TIMING ..................................................................................................................................................5

HOUSE SWAPPING............................................................................................................................................................................5

RENTAL PROPERTIES .....................................................................................................................................................................6

SWITCHING PROPERTY DEDUCTIONS AS IT SUITES ...........................................................................................................6

DEPRECIATION – RENTAL PROPERTIES ..................................................................................................................................6

EXAMPLE OF DEDUCTIBLE EXPENSES.....................................................................................................................................7

REPAIRS OR IMPROVEMENTS? ...................................................................................................................................................7

RESET OF THE COST BASE IF YOU DECIDE TO RENT OUT YOUR HOME ......................................................................8

ARE YOU MAKING THE MOST OF BUILDING DEPRECIATION? ........................................................................................8

CLAIMABLE LOANS.........................................................................................................................................................................8

CONTINUING TO CLAIM INTEREST ON A LOAN AFTER BUSINESS OR INVESTMENT SOLD...................................9

HART’S CASE DECIDED FOR THE ATO – LINKED SPLIT LOANS.....................................................................................10

NON RESIDENTS FOR TAX PURPOSES .....................................................................................................................................12

NON RESIDENT WITH AUSTRALIAN RENTAL PROPERTIES INCLUDING AUSTRALIAN CITIZENS WORKING
OVERSEAS ........................................................................................................................................................................................12

FOR YOUR PERSONAL TAX RETURN .......................................................................................................................................13

MOTOR VEHICLE EXPENSES & SUBSTANTIATION.............................................................................................................13
    EXEMPT VEHICLES ...........................................................................................................................................................................13
    METHODS OF SUBSTANTIATION........................................................................................................................................................13
    WRITTEN EVIDENCE .........................................................................................................................................................................14
    ODOMETER RECORDS .......................................................................................................................................................................14
    CHANGING CARS ..............................................................................................................................................................................15
    WHEN TO BEGIN A NEW LOG BOOK .................................................................................................................................................15
WHEN CAN REAL ESTATE AGENTS CLAIM THEIR VEHICLE EXPENSES? ..................................................................15

EMPLOYEES PAYING WAGES TO THEIR FAMILY...............................................................................................................15

DEDUCTIONS FOR COMMISSION WAGE EARNERS.............................................................................................................16

SAVING TAX ON YOUR INVESTMENT PROPERTY – THE BOOK......................................................................................16

ASK BAN TACS.................................................................................................................................................................................16

BACK ISSUES & BOOKLETS ........................................................................................................................................................16

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                                                   CGT
                 Principal place of residence CGT exemption
   Basically if you make a capital gain when selling your home it is exempt from capital gains tax but there
are some catches and extra benefits. Ensuring that you qualify for the exemption is now more important than
ever because indexing for inflation no longer applies. If you hold the property for 20 years it would not be
unreasonable to expect it to double in value but with no exemption you could lose 23% of that increase in
value in tax. This would mean you would not have the money to buy a similar house elsewhere or possibly
not be able to afford to move. The following is a summary of some important points to the exemption. PPR
stands for principal place of residence.
1) CGT does not apply to your home if it was purchased before 20 September, 1985.
2) The PPR exemption can apply to a forfeited deposit or damages received from a defaulting purchaser
    providing the house is put back on the market and eventually sold.
3) A “Spec” builder who lives in the “spec” home technically qualifies for the PPR exemption but is taxable
    on the profit as normal business income anyway and this overrides the CGT exemption.
4) If the home is owned by a trust or company the PPR exemption cannot apply.
5) If you move into a house as soon as practical after you purchase it the house is deemed to be your PPR
    from the time you purchased it. Further, if at the time of purchasing your new house you have not yet sold
    your old house they can both be your PPR for up to 6 months. Providing during the last 12 months you
    have lived in your old residence for at least 3 continuous months and it was not used to produce income
    during the period in that 12 months that it was not your PPR.
6) If you sub divide the land your home is on and sell the new block separately from your home the PPR
    exemption does not apply. If you build another house on the block the PPR exemption can apply for up to
    6 months if you sell off the old home in that time. Refer point 5 above and TD2000/13 & TD2000/14.
7) Other than the circumstances in point 5 above you can only have one PPR at a time. Providing you have
    at some time lived in the place (refer point 9 for qualifications) you can choose which house you want to
    be considered your PPR but only from the time you first lived there (except re point 10) and only up to six
    years after you move out if it becomes income producing during your absence. The time frame is
    unlimited if it is not income producing while you are not living there. Note if you move back in and then
    out again (refer point 9 for qualifications) you are entitled to another 6 years PPR exemption even if it is
    income producing.
8) If you earn income from your PPR while you are living there than your PPR exemption only applies to the
    percentage of the Capital Gain that represents the percentage of the house used for private use. Note in
    Walters case a person renting out rooms in the home unit she lived in was only allowed a PPR exemption
    for the portion of the unit not rented out. Even though the rent was half of the market value. If you are
    going to take advantage of the circumstances outlined in point 6 but the home was partly used to produce
    income while you were living in it then you can only get the same percentage PPR exemption during the 6
    year period as the percentage the house was used for private while your were living there.
9) When considering whether your house is your PPR the ATO considers the following factors (refer TD51)
    note not all have to be satisfied:
            (a) Electricity and Phone connected in your name.
            (b) Registered on the electoral role to that address.
            (c) The presence of personal effects in the house.
            (d) The address given for mail deliveries.
            (e) Where your family lives.
            (f) The length of time you have lived there.
            (g) Your reasons for occupying the dwelling.
10) You can elect to have vacant land or a property you are renovating classed as your PPR for a period of up
    to 4 years before you move into it providing you do not have another PPR (other than for the 6 months in
    point 5). But you must move in as soon as practical after the building is finished and live there for at least
    3 months before selling or have died.
11) If your house is accidentally destroyed and you sell the land rather than rebuild, your PPR exemption can
    continue to apply to the land until sold providing you do not claim any other place as your PPR.
                                                                                                             (
      "# $   %          & '   '
12) Families are discriminated against in that spouses and their children under 18 can only have one PPR
    between them no matter where they live. Spouses can elect to claim their spouse’s PPR as theirs even if
    they never lived there and even if their name is not on the deed. If both spouses want their separate homes
    to be their PPR they only get half the exemption on each place.
13) If you acquired your PPR after 20th September, 1985 and used it as your PPR until some time after 20th
    August, 1996, when it became income producing you must use the market value of the property at the
    time it becomes income producing, as your cost base. Therefore any assessable capital gain will only arise
    on an increase in the value of the property after it ceased to be your PPR. It is not optional.
14) Some thought should be put into whose name goes on the deed because they will all need to class the
    house as their main residence for it to be totally exempt from CGT. A classic example is a mother putting
    her daughter on the deed so she will automatically have a home when her mother dies. If the daughter
    decides to buy her own home then her mother will have to pay the stamp duty to change the deed or lose
    the exemption on half the property.


     Secret plans and clever trick – CGT & non-capital costs
   In Newflash 50 there were warnings of various ways you could lose your Main Residence Exemption for
CGT purposes. If this has already happened to you don't despair just start collecting records including
digging up old bank statements on the loan, asking Council and your insurance company for copies of all that
you have paid them since you purchased the house. Section 110-25 subsections (2) to (6) cover all the
relevant costs that can be used to reduce your capital gain. Subsection (4) allows owners of homes purchased
after 20th August 1991 to claim as a deduction for CGT purposes non capital costs of holding the home if they
have not already been claimed as a tax deduction against rent or other income earned from the house.
Holding costs are rates, land tax, interest expenses, building insurance, repairs and maintenance. If you have
lost the main residence exemption for only part of the period of ownership the holding costs for the whole
period of ownership are first taken into account to calculate the whole capital gain and then apportion the
percentage subject to CGT.
   You should also do this if part of the house has been used for income producing purposes and that part is
not considered a separate asset. The portion of the holding costs that have been claimed as a tax deduction
cannot be included in the cost base but the private portion that was not claimed can be included in the whole
cost base before apportioning the capital gain. Note holding costs cannot be used to increase the capital loss
on an asset nor can they be used if the asset is a personal use asset (houses are excluded here) or a collectable.
   If in doubt throw it all in a big box. The biggest tax minimisation scheme is just plan keeping records.


                              Demolishing a rental property
    The owner of a rental property wishes to demolish it and build a home she can live in on the site. She asks
what valuations etc will be required to keep property records of the cost base for CGT purposes.
Answer:
    No need to get valuation. Both the original cost of the property, the demolition costs and construction costs
of the new house will be included in the cost base for CGT purposes. This property will always be subject to
CGT even though the portion will decrease over the time it is used as a main residence. Accordingly, you
need to keep very good records of all expenditure including rates, interest, R&M and insurance while it was
your main residence.
References:
    ID 2002/514 if the demolition expenses were incurred to enhance the value of the land, and are reflected
    in the state of the land when it is sold, they are included in the cost base, even when incurred to facilitate
    the construction of another dwelling.
    TD 1999/79 the demolition of the house is a CGT event. But it does not create a capital loss unless money
is received for it (ie insurance). ID 2002/633 says that this is because the building has a zero cost base.
Subsection 112-30(5) the original cost base is attributed to the remaining part (ie the land).




                                                                                                             )
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                                   The 50% CGT discount
   As you are probably aware you need to hold onto a property for over 12 months from the date of signing
the agreement to purchase to the date of signing the agreement to sell in order to qualify for the 50% CGT
discount. Some clients have been making a very quick gain on properties and are impatient to sell in case
prices fall. The choice is sell now and lose a lot of the profit in tax or hold on and take a risk on future prices.
From the buyers point of view they are probably more concerned that prices will continue to escalate but are
not in a rush to start paying interest on the loan. In fact the chance to fix a contract at today's prices but not
have to pay anything for several months could be very attractive to some buyers.
   ATO ruling TD 16 states - If an option is granted the date of the acquisition for the buyer and the selling
date for the vendor, is the date of the exercise of the option.
   Of course an option gives a purchaser the chance of avoiding entering into the contract to buy the property
so you must charge a large enough amount for the option to ensure that the purchaser will exercise it after the
date you specify.


                              CGT – 50% discount – timing
   In order to qualify for the 50% CGT discount you must hold an asset for more than 12 months. That is 12
months and at least one day from the date of the agreement to buy to the date of the agreement to sell. TD
94/D92 and Case 9451 (1194) 28 ATR state that a simple condition in the contract such as subject to finance
will not delay the date of the contract. Only a condition precedent to the formation of the contract delays the
date that the contract is deemed to be entered into. Most conditions on contracts are conditions subsequent so
will not delay the contract date. To be a condition precedent it really has to be a condition that must happen
before the contract comes into being. Accordingly, it would be difficult to use a condition precedent to delay
a contract yet have a binding sale.


                                          House swapping
       If considering swapping houses to claim rental deductions as discussed in Noel Whittaker’s 19-10-03
column make sure you live in the home you purchase before swapping. This will allow you to exempt the
home from capital gains tax for up to 6 years. Section 118-145 allows you to move out of your main
residence and continue to give it your exemption for capital gains tax purposes. Further at the end of the 6
years you can move back in, then move back out and the 6 years clock starts all over again. TD 51
(www.ato.gov.au) list the factors that the ATO takes into account when considering whether the house was
your main residence during the time you are actually living there. These include where your personal effects
are stored, the connection of utilities in your name, changing your address on the electoral roll etc. Neither the
legislation nor the ruling specifies a time period that you are required to live there.




                                                                                                               *
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                                   RENTAL PROPERTIES
                  Switching property deductions as it suites
    The age old question of property investors has been whose name should I buy the property in?
    Its great to have it in the high income earner’s name when it is negatively geared but bad when it becomes
positively geared. When you make a high capital gain you wish you had more owners to spread the gain over.
Just when you think you have made the right choice your circumstances change.
    There is a legitimate way you can have the best of both worlds. This method allows you to share the
capital gains between spouses, split the rent and depreciation but allows the highest income earner to
effectively claim all of the cash flow expenses as a tax deduction. The arrangement is so flexible it can be
adapted if the spouse who is the highest income earner changes.
    This is very simply achieved by buying the property in joint names but the highest income earner salary
sacrifices the cash flow expenses. There is a “legal fiction” in the FBT legislation that deems any benefit
received by an associate (i.e. spouse) of an employee to be received by the employee. This extends to the
otherwise deductible rule (FBTAA section 24). Accordingly, 100% of the expenses are considered otherwise
deductible to the employee so the employer is not liable for FBT. Otherwise deductible expenses are exempt
fringe benefits.
     Sounds too good to be true doesn’t it? Well the case it is based on is over 10 years old (NAB v FCT
1993). Unfortunately not many people are doing it because their employers baulk at the idea. You can’t
blame them since it is the employer who will have to pay the extra tax if the ATO disallow the arrangement
yet it is only the employee who benefits. What the employer needs to do is get their own private binding
ruling from the ATO so they can be confident of the arrangement. We already have a ruling so referring to
our private ruling should make the process easier. Full details of this are available on our web site
www.bantacs.com.au click the Rental FBT button. There is also a calculator on the web site that will help
you work out how much tax you will save every year by this arrangement. For example, assume the low
income earner is in the 31.5% bracket, the high income earner is in the 46.5% bracket, the cash flow expenses
such as interest are $20,000 and the arrangement does not change their relative tax brackets just their amount
of taxable income. The tax saving will be $1,500 per year.



                              Depreciation – Rental properties
There has been considerable publicity lately about claiming building depreciation on rental properties by
having a quantity surveyor calculate the original building costs and value of plant and equipment. A good
reference regarding the building costs is ATO ruling TR 97/25 available from the ATO web site. There are a
couple of little catches to relying on a quantity surveyor's report. The first one being that you can only rely on
a quantity surveyors report if you have exhausted all other means of finding out the original building costs.
The legislation even compels the seller of a property to provide you with this information - Subsection
262A(4AJA) of the 1936 Act. The second catch is if the original owner was a spec or owner building the
calculation cannot include their labour or profit.
   Before you spend money on a quantity surveyor make sure you have exhausted all other means of
ascertaining the original building price because the ATO will not permit you to use the quantity surveyor's
report if you can ascertain the original cost. You should also find out if the original owner was a spec or
owner builder. Further make sure the quantity surveyor you use is aware of the changes in depreciation rates
for plant and equipment since 1st January 2001. These are set out in detail in TR 2000/18C5, for example
refrigerators are now to be depreciated over 20 years that is 5% prime or 7.5% diminishing value method,
Carpets are 10% prime or 15% diminishing value method. The ruling covers most items including stuffed
crocodiles that are considered to have the same life expectancy as a refrigerator.




                                                                                                             +
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                              Example of deductible expenses
                                             th
        Building depreciation for properties built after 17 July, 1985, more details on this in other articles.
        Motor Vehicle Expenses in relation to collecting rent, organising repairs, paying expenses, etc. There
are various methods and requirements to calculate this claim, all of which I cannot list here. The most popular
method is to claim a rate set each year by the tax office of approximately 60 cents per kilometre based on a
“detailed and reasonable estimate” of kilometres travelled. In order to use this method you must not claim
more than 5,000 kilometres, per car, in the year for all claimable purposes, note if the vehicle is owned by two
people they get 5,000 kilometres each. You must own the vehicle, make the appropriate election and
personally incur the costs associated with the vehicle. Note if you do more than 5,000 kilometres you can
reduce your kilometres to 5,000 in order to use this method or use another method.
        Travel Expenses as above i.e. airfares and accommodation if the property is in another state. A travel
diary and receipts meeting the substantiation requirements would be required if away for more than 5 nights.
        Agent’s Commission to manage property.
        Telephone, Stamps, Stationery, Insurance, Advertising, Land Tax Secretarial, Bookkeeping, Tax
Agent and Legal Fees regarding lease or rent recovery, not buying and selling.
        Borrowing Expenses, if more than $100 can be claimed over 5 years or term of loan whichever is the
shorter period. If less than $100 can claim immediately.
        Depreciation on Curtains over 6 2/3 years, Blinds & Venetians over 20 years, Carpets and Vinyl over
10 years, Lawn Mowers, Furniture over 13 1/3 years, Hot Water Systems over 20 years, Air Conditioners
room units over 10 years central over 13 1/3 years, Security over 20 years or Fire Systems but not doors, The
Motor on Steel Roller Shutter Doors, Prefabricated Built-in Robes and Cupboards but not kitchen Cupboards;
Ceiling Fans, Dishwasher, Electrical Meters & Switchboards, Incinerators, Intercoms, Freestanding Electrical
Appliances such as Fridges over 13 1/3 years, Microwaves over 6 2/3 years, Vacuum cleaners over 10 years,
Washing Machines over 6 2/3 years TVs, etc, Satellite Dish, Sprinklers, Lifts, Lights and Free Standing
Stoves over 20 years. Swimming Pools cannot be depreciated as plant in Australia Case T102 1986.


                                  Repairs or improvements?
   Repairs and Maintenance, not improvements are deductible. For example if the house needed painting
when you bought it then painting it would be an improvement, therefore not deductible. On the other hand if
during the time of your ownership the paint starts to peel and you repaint, these expenses would be a
deduction. No deduction is available for your own labour. Take care to perform repairs only when the
premises are tenanted or in a period where the property will be tenanted before and after with no private use in
the middle (IT180). Do not make repairs in a financial year during which you may not receive any rental
income (IT180). If a property is used only as a rental property during the whole year then a repair would be
fully deductible even though some of the damage may have been done in previous years when the property
was used for private purposes (TR97/23). Note this does not apply if the damage was done in a period you
did not own the property. If the state of disrepair the property was in at the time you purchased it is directly
responsible for further damage when you own it, all the repairs relating to that damage are considered
improvements (Law Shipping Co. UK). A repair can become an improvement if it does not restore things to
their original state (case M60) i.e. replacing a metal roof with tiles. The whole cost of the tiled roof would be
an improvement and no deduction would be available for what it would have cost you to put up another metal
roof. But a change is not always an improvement. In ID 2002/330 the ATO states that the cost of removing
carpets and polishing the existing floorboards is deductible. Yet in ID 2001/30 underpinning due to
subsidence was considered by the ATO to be an improvement not a repair. It is not necessary to use the
original materials to restore the thing or structure to its original state. Modern materials can be used even
when these might be a slight improvement because they are more efficient. As long as the benefit is only
minor or incidental it can still be considered a repair.
   Work that replaces the whole thing or structure is an improvement not a repair. So don't pull down all of
the old fence and replace it just replace the damaged area. TR 97/23 recognises that eventually the whole
thing or structure may be replaced in a progression of repairs. These repairs are still deductible providing
each repair is on a small scale, the progression is over a long period of time and that it is not just in reality a
replacement done over time but individual repairs.

                                                                                                              ,
      "# $   %          & '   '
   Tree removal is claimable if the trees have become diseased or infested during the time of ownership.
Removal is also claimable if the tree is causing damage such as roots interfering with pipes and the damage
was not present when you purchased the property. If a tree is removed because it may cause damage in the
future or you are fed up with the leaf litter that has always happened since you bought the property, then you
are making an improvement which is not deductible.
   Note improvements that are still present when the property is sold can increase your cost base for CGT
purposes.


    Reset of the cost base if you decide to rent out your home
    Section 118-192 of ITAA97 deems you to have sold and repurchased your home at market value if you
first rent it out after 20th August 1996. Most people thought section 118-192 was a concession to help out if
they hadn't been keeping records because they never intended to rent it out. Very few people realised that this
was not an optional election but binding on everyone.


             Are you making the most of building depreciation?
    Some buildings qualify to be depreciated at 4% instead of 2.5%. Commercial buildings constructed after
   th
26 February, 1992 will qualify for the 4% depreciation rate if they are “used mainly for Industrial activities
or amenities or offices for workers and supervisors involved in industrial activities.” Otherwise only 2.5%
applies. Industrial activities are:
     1) The manufacturing of items or storage of manufactured items.
     2) Processing of primary products
     3) Printing, lithographing and engraving.
     4) Preparation of foodstuffs in a factory or brewery.
     5) Activities associated with the above such as packaging and cleaning.
     For other Commercial buildings started before 26th February, 1992 and after 16th September, 1987 the
depreciation rate is 2.5%. On Commercial buildings started before 16th September 1987 and after 21st August,
1984 depreciation of 4% is allowed. Prior to 21st August, 1984 only 2.5% depreciation is permitted. No
depreciation is permitted on Commercial buildings constructed before 22nd August, 1979.
     Buildings constructed after 26th February, 1992 can be depreciated at 4% if they are used as a motel, hotel,
guesthouse or short term traveler accommodation providing there is at least 10 bedrooms or apartments.
    Residential properties on which construction first commenced after 18th July, 1985 and before 16th
September, 1987 are entitled to be depreciated at 4% per annum. If constructed after 16th September, 1987
they are only entitled to 2.5% depreciation.
     Note, the above applies even if the current owner did not own it during that period.


                                         Claimable loans
        Traditionally, the interest is only claimable on a loan where the actual money borrowed is used
directly to produce income i.e. buy the income producing property. The Roberts and Smith case of July 1992
has changed this. In this case a firm of solicitors borrowed money to pay the partners back some of the
original capital they had invested in the firm. The Commissioner argued, as has been accepted in the past,
that the proceeds of the loan were not used to produce income but for the private use of the partners. The
Federal Court ruled that such a simple connection is not appropriate – the partners have a right to withdraw
their original investment and as a result the business needed to borrow funds to finance the working capital
deficit. It was irrelevant that the loaned money was paid directly to the partners, the purpose of the loan was
to allow the income producing activity to continue. The tax office issued a ruling on this matter TR95/25.
The ruling states the Roberts and Smith case cannot apply to individuals i.e. sole owners of property because
technically they cannot owe money to themselves. The ruling goes on to say:
“The refinancing principle” in Roberts and Smith has no application to joint owners of investment property,
which are not common law partnerships. The joint owners of an investment property who comprise a sec 6(1)
tax law partnership in relation to the property cannot withdraw partnership capital and have no right to the
repayment of capital invested in the sense in which those concepts are used in Roberts and Smith.
Accordingly, it is inappropriate to describe a business, as a “refinancing of funds employed in a business.”
                                                                                                            -
      "# $   %         & '   '
        IT2423 states that people who own less than three rental properties are not in business and therefore
not in partnership under general law. This means that couples wealthy enough to be purchasing their third
rental property can rent out their home then borrow the money to build themselves a new home and maybe
claim the interest on the loan as a tax deduction against the rent earned on their old home. Note there have
been a few cases were taxpayers have unsuccessfully tried to argue they are in business. In Cripps V Federal
Commissioner of Taxation 1999 AATA 937 the taxpayers owned 14 town houses and other properties at
various time. The ATO was successful in arguing they were not in business but the foundation of the ATO’s
argument was that they had an agent managing the properties. So it is crucial that you run the properties as a
business i.e. fully mange them yourself.
        Regarding linked and split loan facilities. These loans link a loan for the rental home and a loan for
the private home together so the bank will permit repayments from both rental and wages income to be paid
off the private home loan with the interest on the rental home loan compounding. Accordingly, in a short
period of time the mortgage can be shifted from the private home to the rental home. As the rental loan was
used to purchase the income producing property and pay interest on that property, technically all the interest
on that loan will be deductible. The Commissioner says in TR98/22 this is a scheme with the dominant
purpose of reducing tax and he will apply Part IVA to deny a deduction for the interest on the interest. The
High Court found in Harts’ Case 27-5-2004 that it was an arrangement with the dominant purpose of avoiding
tax and caught by Part IVA but the court did not rule that interest on capitalized interest was not deductible.
More details of the High Court’s decision in Hart’s Case and ways of capitalizing interest appear in our
claimable loans booklet.
        It is dangerous to use a line of credit facility on a rental property loan when you will be drawing funds
back out to pay private expenses. Based on the principle that the interest on a loan is tax deductible if the
money was borrowed for income producing purposes, the interest on a line of credit could easily become non-
deductible within 5 years. For example: A $100,000 loan used solely to purchase a rental property in financed
as a line of credit. To pay the loan off sooner the borrower deposits his or her monthly pay of $2,000 into the
loan account and lives off his or her credit card which has up to 55 days interest-free on purchases. The
Commissioner now considers there to be $98,000 owing on the rental property. In say 45 days when the
borrower withdraws $1,000 to pay off his or her credit card the loan will be for $99,000. However, as the
extra $1,000 was borrowed to pay a private expense, viz the credit card, now 1/99 or 1% of the interest is not
tax deductible.
        The next time the borrower puts his or her 2,000 pay packet into the account the Commissioner deems
it to be paying only 1/99 off the non-deductible portion i.e. at this point there is $96,020 owing on the house
and $980 owing for non-deductible purposes. When, 45 days later, the borrower takes another $1,000 out to
pay the credit card, there will $96,000 owing on the house and $1,980 owing for non-deductible purposes so
now only 98% of the loan is deductible, etc, etc.
        In addition to the loss of deductibility, the accounting fees for calculating the percentage deductible
could be high if there are frequent transaction to the account. The ATO has released TR2000/2 which
confirms this and as it is just a confirmation of the law is retrospective.
        To ensure deductibility and maximise the benefits provided by a line credit you will need an offset
account that provides you with $ for $ credit. These are two separate accounts – one a loan and the other a
cheque or savings account. Whenever the bank charges you interest on the amount outstanding on your loan
they look at the whole amount you owe the bank i.e. your loan less any funds in the savings or cheque
account.


      Continuing to claim interest on a loan after business or
                         investment sold
A reader has sold an investment property for less than the amount he borrowed. He wants to know if he can
still continue to claim the interest on the balance of the loan. The ATO has lost a few cases in this regard
lately so there is a good chance that the reader will qualify for a tax deduction. FC of T v Jones, 2002 ATC
4135 and FC of T v Brown, 1999 ATC 4600 and TR 2004/4 are the references. TD 95/27 has been amended
as the ATO recognizes that an employee using a car for work purposes that sells for less than the outstanding
loan can continue to claim the interest.

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    Everything you can do to bring yourself into line with the positive points of the cases mentioned above
should be done. Some of the relevant facts that you may be in a position to do something about are:
    1) All the proceeds of the sale should be used to repay as much of the loan as possible.
    2) Endeavor to appear to be unable to repay the loan from other assets other than the family home. This
        may mean as a couple if only one member owned the property sold at a loss the other member should
        hold any further investments.
    3) Don’t refinance the loan to extend its term or increase the interest rate. You must appear to be doing
        all that is possible to eliminate the loan. So refinancing to reduce the interest rate is ok. On the other
        hand if you have to change the loan from principle and interest to interest only because that is the only
        way you can afford the repayments you may be able to justify changing the loan.
    4) If the loan is already fixed at the time the investment is sold, then you have an argument that you could
        not pay it out. This is a factor to consider if you are refinancing before the sale.
    The above also applies if the investment was shares or if a business was sold for less than what is owing on
it. In the case of a business the ATO has issued a statement that division 35 cannot work to quarantine the
interest in these circumstances as the taxpayer is no longer in business. Division 35 is discussed in Non
Commercial Busineses booklet. But all you really need to know is that Division 35 will not stop you claiming
the interest


         Hart’s case decided for the ATO – Linked split loans
             th
     On Friday 27 May, 2004 the High Court handed down its decision on Linked Split Loans in favour of the
ATO.
     I do not find it too surprising that they found that these types of loans were a scheme with the dominant
purpose of a tax benefit therefore caught by Part IVA. This case was a clay pigeon for the ATO and yet it still
needed to go all the way to the High Court. It was a clay pigeon because the banks marketed these
arrangements on the basis of the tax savings. Therefore it was difficult for the taxpayer to argue a different
motive.
    It is important to remember this case does not change the deductible nature of interest or for that matter
interest on interest. Gleeson & McHugh specifically stated that the question of the deductibility of interest
upon interest does not need to be addressed because the issue was already decided on the basis that there was
a scheme to gain a tax benefit.
   The moral of the story is not to get involved with mass marketed tax schemes unless they have an ATO
ruling. This is because the ATO has no trouble proving your primary motive was a tax benefit as there is
always an abundance of marketing propaganda to prove this.
   On the other hand don’t lose sight of the fact that you are not obliged to pay more tax than necessary. In
IT 2330 the ATO states:
         "Notwithstanding that an arrangement may not be capable of explanation by reference to ordinary
         business or family dealing and even though it may be entered into to avoid tax, it will not attract the
         operation of section 260 (now Part IVA) if its purpose is to take advantage of a specific or particular
         provision in the Income Tax Assessment Act and complies in every respect with the requirements of
         the specific or particular provision, i.e., the choice principle."
    This approach is supported in Harts case where the judges stated;
         “If such a taxpayer took out two separate loans, and the terms of the loan for the investment property
         were different from the terms of the loan for the residential property in that they provided for a higher
         ratio of debt to equity, and for payments of interest only, rather than interest and principal, during a
         lengthy term, then ordinarily that would give rise to no adverse conclusion under [Part IVA]. It may
         mean no more than that, in considering the terms of the borrowing for investment purposes, the
         taxpayer took into account the deductibility of the interest in negotiating the terms of the loan. How
         could a borrower, acting rationally, fail to take it into account?”
    Unfortunately the judges concluded that such a loan was not normally available so it was not reasonable to
argue it was a normal arrangement apart from the tax benefit. Ultimately it was the linking of the loans that
sunk them. This should not discourage investors seeking similar loans that stand on their own merits rather
than being linked to a non deductible loan.


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   Fine tuning this theory in relation Part IVA we need to recognise that this test has two elements. Firstly
there has to be a scheme and secondly it needs to have a dominant purpose of a tax benefit. In Hart’s case it
was recognised that a scheme as per 177A(1)(b) can basically include any …. course of conduct. So there is
no point in poking around here for a gap other than to say the legislators could not have intended this section
to be so wide or it would catch everything.
   So now let’s look at the dominant purpose of a tax benefit test. Which must also be present for Part IVA to
apply. No this does not mean that if you walk into a newsagency to buy an invoice book your dominant
purpose was to gain a tax deduction for the book and as it was a “course of conduct’ that is it not a tax
deduction because this is a tax scheme. We have to be more realistic than that. Nevertheless the High Court
found that Hely J was correct in stating:
         “A particular course of action may be both tax driven, and bear the character of a rational commercial
        decision. The presence of the latter characteristic does not determine in favour of the taxpayer
        whether, within the meaning of Pt IVA, a person entered into or carried out a ‘scheme’ for the
        dominant purpose of enabling a taxpayer to obtain a tax benefit”.
So finding another reason to justify the arrangement is not enough. It is all about the dominant purpose.
The simpler the arrangement the better, the more artificial it becomes the more it meets the definition of a
scheme.
   The court having disallowed the capitalised interest because it was part of a tax scheme did not have to rule
on whether capitalised interest itself was tax deductible. I feel that the capitalised interest would normally be
deductible providing it has not been created as part of a scheme with a dominant purpose to save tax.
   Say for example you have a line of credit on your rental property and a separate loan on your home. Your
tenant may pay you a couple of months rent in advance which you pay off your home loan as everything is up
to date and cash flow looks good at the time. Over the next two months you have quiet a few personal
expenses that take up all of your wages. Then the rates and some repairs are due on the rental property. You
need to draw the funds to cover the rates and repairs from the line of credit on the rental property and due to
lack of funds the interest that month has to be capitalised. Luckily you just manage to make the P&I payment
required on your home loan. This scenario is not a scheme. Events just happened that way and it is not for
the ATO to tell you how to manage your affairs. Linking the two loans or a systematic approach to the
increase in the loan on the rental property may point towards a scheme. Just watch out for spare funds to
make extra repayments on your home and don’t prop up the rental property with your spare cash if you can
use the equity in your rental property instead.
   This principle can also work with a business instead of a rental property.




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             NON RESIDENTS FOR TAX PURPOSES
     Non resident with Australian rental properties including
              Australian citizens working overseas
    It is a lot easier to become a non resident for taxation purposes than it is for immigration purposes. If a
non resident has a rental property in Australia they are still subject to Australian tax at non resident rates on it.
If the property is rented and makes a loss these losses can be carried forward and offset against future
Australian income. In order to carry these losses forward an Australian income tax return must be lodged for
each year.
    It does not matter which country the money is borrowed in, if it was used to purchase the rental property in
Australia it will be deductible against the rent received.
       A non-resident will also be liable for tax on a capital gain on the sale of the rental property.
       More information is available in our Overseas booklet under free publications on www.bantacs.com.au




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                 FOR YOUR PERSONAL TAX RETURN
                    Motor vehicle expenses & substantiation
  This is a summary of the Motor Vehicle Substantiation Bill of 1994. Areas of the bill that are not relevant
to the average taxpayer have been omitted. Accordingly, it should be treated only as a basic guide to build on
when you consult your accountant. These notes do not apply if a company owns the motor vehicle, in which
case the Fringe Benefits Act applies.

Exempt Vehicles
  To claim a deduction for the costs associated with the following vehicles, it is necessary only to keep a
“record” of expenses:
    a) A taxi or a vehicle designed principally to carry a load of less than one tonne i.e. a utility, panel van or
        Hiace van with only the front seats and some dual cabs, provided that vehicle is used only for business
        travel, travel to and from work and buying lunch etc. The vehicle would still be considered only used
        for business if the private use is minor and irregular.
    b) Motor Cycles, Earthmoving equipment and Trucks designed to carry a load of more than 1 tonne.
    c) Motor vehicles used as trading stock or used for hire or cars you hire.
    d) Motor vehicles to which fringe benefits tax applies. Note there are other substantiation requirements
        in the Fringe Benefits Act that apply to these vehicles.
  Note if you borrow a car (i.e. use a car that is in your spouse’s name) you are not entitled to use the
following methods of substantiation but are still required to prove your claim. You must own or lease the car
to be able to use the following methods.
Owning a car includes hire purchase agreements.

Methods of Substantiation
 There are 4 methods of substantiation available:
  1) The flat 12% of the cost of the motor vehicle or market value when leased method which is available
      only to motor vehicles that travel more than 5,000 kilometres for business that year. Note – consult
      your accountant if the vehicle was more expensive than the average family car.
  2) Claim a deduction for one third of the motor vehicle’s expenses. The car must have travelled more
      than 5,000 kilometres for business that year. You will need odometer records and written evidence of
      all expenses.
  3) If the motor vehicle travels less than 5,000 kilometres for business you may choose to use the cents per
      kilometre method. This method is also available for motor vehicles that travel more than 5,000
      kilometres for business provided you reduce the claim to 5,000 kilometres only. You are required to
      keep a “detailed reasonable estimate” i.e. if you do the same number of kilometres per week, keep a
      record for one week and multiply by the number of weeks. If travel is irregular a list or diary entry of
      kilometres travelled is sufficient. Detailed means you cannot pull a number out of your head for the
      full year. According to TD93/177 it is the distance travelled by the taxpayer’s car not the taxpayer that
      is relevant in calculating the kilometres travelled and each owner of the car is entitled to 5,000
      kilometres. This means that if a car is owned jointly and both parties are travelling in the car together
      then you are still entitled to claim only up to 5,000 kilometres combined. On the other hand, if the car
      is owned jointly each owner is entitled to claim up to 5,000 kilometres each for business travel as an
      individual. For example, a husband and wife may own 2 cars and both cars are in joint names. The
      husband could use car one for 6 months and clock up 5,000 kilometres then swap with his wife and
      use car two for 6 months to clock up another 5,000 kilometres. The wife could do the same with the
      cars reversed. As a result, they would both be entitled to claim 10,000 kilometres, 5,000 kilometres
      for each car they own. If you change cars during the year, you can claim 5,000 kilometres for each
      car. For the 2005/06 year the cents per kilometre are: up to 1600cc 55 cents, 1601-2600cc 66 cents
      and over 2600cc 67 cents.
  4) The log book method requires written evidence for all expenses and odometer records to be kept each
      year (refer definitions below). You may use the log book method if the car travels less than 5,000
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       kilometres for business but it is unlikely that this method will give you the best deduction. Log books
       are required to be kept at least every 5 years. The log book is to be kept for 12 continuous weeks (or
       the period you own the car if less than 12 weeks). If you have more than one car using the log book
       method a log book must be kept for each car at the same time. The log book should include the
       following:

At each entry:
   a) The date the journey began and the date it ended or for each day if journey longer than a day.
   b) The odometer reading at the start and end of the journey.
   c) The number of kilometres the car travelled on the journey.
   d) The reason for the journey, a pedantic auditor may require the destination
       (MT2026 Archived).

In each log book:
    a) The period the log book begins and ends.
    b) The odometer readings at the start and end of the log book period.
    c) The total kilometres travelled during the log book period.
    d) The business kilometres.
    e) The percentage of total kilometres that were business during the period.

Note – the actual percentage applied to the motor vehicle expenses is not necessarily that calculated in the log
book because you are also required to take into account any other records including the odometer readings for
that year, variations in the pattern of use and changes in the number of cars you own.

                DON’T FORGET TO TAKE YOUR SPEEDO READING EACH 30TH JUNE

Written evidence
  Both the log book and one third of all expenses methods require “written evidence” of all expenses except
fuel which can be calculated based on the amount of fuel used per kilometre. Note – if you calculate your fuel
this way for the one third of all expenses method, you are required to keep odometer records as defined below.
Written evidence must be a document from the supplier setting out the following:
    a) Name of the supplier
    b) Amount of the expense
    c) Description of goods or services
    d) Date of incurring the expense
    e) Date of document

Note - if the document does not show the date the expense was incurred, you can use a bank statement to
support the claim. You may write the description of the goods or services on the document yourself. If the
Commissioner considers it unreasonable to expect you to have written evidence (i.e. bridge tolls), you can just
keep a record regardless of the size of the expense. If the expenses are for $10 or less you may just keep a
record of these expenses providing the total does not exceed $200.

Odometer Records
  Each year a record must be made for each car under the log book and one third of expenses methods
containing the following:
   a) The car’s odometer readings at the start and end of the period.
   b) Any nomination regarding a replacement car. If this is the case, Items a, c & d should be kept
       for both cars.
   c) The car’s make, model and registration number.
   d) The cubic capacity of the engine.




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Changing Cars
  If you change cars during the year and the car would have done more than 5,000 kilometres for business if it
had been used for a full 12 months, you may use the methods that require more than 5,000 kilometres business
use. Careful, you may find you would be better off claiming the kilometre rate of 5,000 kilometres for each
car. If you own a car for only part of the year and choose to use the 12% of cost method, you must pro rata
the 12% over the period of ownership. If you are using the log book method and the new car will be doing the
same travelling as the old, you can nominate to use the old log book as the log book for the new car, subject to
the 5-year limit. Note - you must record the closing odometer reading on the old car and the opening
odometer reading on the new.

When to Begin a New Log Book
  Log books must be renewed for a continuous 12 week period at least every 5 years.
Odometer records are required every year. You must keep a log book for an income year if, during that year,
you get one or more additional cars for which you want to use the log book method for that year. If the
business percentage increases you should keep another log book to support a bigger deduction.


    When can real estate agents claim their vehicle expenses?
    Basically the only trip a Real Estate Agent can’t claim for is the trip from home to the office if he or she
are not carrying bulky equipment. Bulky equipment would be items that weigh more than 20kg in total or are
too bulky and awkward to carry on the train etc. Signs are worth considering here. Further if a Real Estate
agent travels from home to an abnormal work place (such as a property he or she has listed for sale) and then
on to the office the whole journey from the moment he or she left home is claimable.
    Once the Real Estate Agent arrives at work any further travel undertaken for work purposes during the day
is tax deductible. In order to claim the trip home from the office, if a property listed for sale is not visited on
the way home, the bulky equipment claim mentioned above in regard to home to work travel needs to be
considered. Note with the bulky equipment claim you must have a reason, for carrying the bulky equipment.


                  Employees Paying Wages to Their Family
    TR98/6 is a ruling for Real Estate Agents. It recognises that even though the sales people are paid wages
as an employee they are entitled to claim a tax deduction for any wages they pay to family members for
helping them. The family member must do something significant, it is not enough to just answer the phone
and a diary of the hours worked must be kept. The wage must be at market rates. If the sales person is paid at
flat wage with no commission the ruling doubts that they would be entitled to this claim but invites the public
to come forward and they will fund a test case to bring the matter before the courts.
   This concept does not just apply to Real Estate Agents. It is applicable to all employees who’s wages are
on a commission basis. Section 26-35(1) says you can deduct an amount of a payment you make or a liability
you incur, to a related entity. Section 8-1(1) ITAA 1997 states “You can deduct from your assessable income
any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. This
means that you do not need to prove that the payment was actually made. Only that the work was done
therefore you have a liability to pay the family member. This is important when spouses run a joint bank
account as it is difficult to prove the money has actually been paid.
      Ryan’s case decided in July 2004 by the AAT gives us the opportunity to take this one step further. Dr
Ryan ran a computer consulting company that employed him and his wife. Ryan’s wife only performed
secretarial work for his company. She was paid at commercial rates for the amount of time she spent on
company business. This was a relatively small amount but much, much more was contributed to
superannuation on her behalf. The AAT found that Ryan was entitled to a tax deduction for these
superannuation contributions.




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                        Deductions for Commission Wage Earners
   The definition of what is considered a cost of earning you income, is wider for employees whose wages are
paid on a commission basis. TR98/6 is a ruling for Real Estate Agents but the concepts would apply to all
wage earners whose income is based on commission. It recognises expenses not directly related to earning
income would still be deductible because there is a prospect they will result in greater income in future years.
These sorts of expenses include advertising properties, signs, letter box drops, sponsorship, property
presentation costs, referral rewards, gifts and greeting cards.
   Note even though taking someone out to lunch would have the same benefit it is specifically not deductible
because it is entertainment. Buying them a beer would also be entertainment but buying them a gift of wine
or beer that has not been opened ie they can take it home, is not considered entertainment so would be
deductible as would any other gift.
More Information
   On the Tax Office web site www.ato.gov.au there is a ruling called TR98/6 which goes into great detail
about what the ATO considers deductible to Real Estate Agents.


             Saving Tax on Your Investment Property – The Book
    “Every investment property tax-related question you’ve ever wondered about is answered here and
    – perhaps more importantly – the ones you didn’t think to ask but should have! For property
    investors who want to refine their strategy for maximum gain, this resourceful handbook will make
    a great constant companion.” Eynas Brodie, Editor, Australian Property Investor magazine.
Combining Noel Whittaker’s easy reading style with Julia Hartman’s mind numbing attention to detail was a
major challenge which ran way over schedule but it is finished, printed, and in the book stores. You can also
purchase it online by going to: www.bantacs.com.au/property.php. The cost is $29.95 plus $5.95 postage – tax
deductible of course!

                                                                 Ask BAN TACS
For $59.95 you can have your questions regarding Capital Gains Tax, Rental Properties and Work Related
Expenses answered. For your Accountant, we will include ATO references to support our conclusion. Just go
to www.bantacs.com.au and look for the Ask Bantacs link under ‘Most Popular’ on the home page.


                                                              Back Issues & Booklets
To obtain free back issues of the fortnightly BAN TACS Newsflash or any of the following booklets visit our
web site at www.bantacs.com.au/publications.php. You can also subscribe to our Newsflash reminder.

                                                                                                                        ! "
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